This article applies specifically to any leave that is paid out on termination and discusses how the leave category for that leave should be configured so that it complies with STP disaggregation of gross requirements.
When reporting gross earnings via STP, paid leave is one of the itemised components that is reported. Further to that, paid leave is broken down and reported into the following sub-sections:
- Cash out of leave in service
- Ancillary and defence leave
- Paid parental leave
- Worker's compensation
- Unused leave on termination
- Other paid leave
Definitions of each sub-section can be found here. Additionally, general information about how leave categories should be set up to ensure compliance with STP Phase 2 can be found here.
Differentiating between unused leave on termination and other paid leave
When setting up a leave category for leave that will be paid out on termination, it is essential to differentiate between paid leave earnings associated to leave actually taken (ie 'other paid leave') and paid leave earnings associated to unused leave paid out on termination (ie 'unused leave on termination').
To do this, the payment setup of a leave category must be configured to "Report leave earnings against a specific pay category". When this option is chosen, the following sub-settings will display:
- When an employee takes leave, apply earnings to: For this setting select, from the dropdown list, the applicable pay category that will be applied in the pay run when an employee is paid for leave taken.
- When an employee is paid out unused leave on termination, apply earnings to: For this setting select, from the dropdown list, the applicable pay category that will be applied in the pay run when an employee is terminated and any unused leave is paid out as a result of the termination. A pay category can only be selected for this setting if the leave category is not classified as ETP (ie the 'ETP' checkbox is not selected) or the 'Exclude from termination payout' checkbox is not ticked. Refer below for further detail on how this setting interacts with ETPs and terminations as a result of a genuine redundancy.
An example of this payment setup is as follows:
Please take note of the following:
- You must not apply the same pay category for the 2 sub-settings!
- You must ensure the correct payment classification is assigned to the pay categories selected for these sub-settings.
ETPs and genuine redundancy
When unused leave is paid out on a termination that is classified as ETP or the termination is due to a genuine redundancy, the leave earnings are not to be reported to the ATO 'other paid leave'. Rather, they are classified as either ETP or lump sum payments, depending on the specific scenario.
When processing an ETP or genuine redundancy in the pay run, the platform will automatically assign the applicable system pay categories to the associated leave earnings. Additionally, all system pay categories are mapped to the correct payment classification, as per ATO requirements. As such, the "When an employee is paid out unused leave on termination, apply earnings to" setting discussed above does not apply to these leave payments.
For example, the leave category 'Time in lieu' is classified as ETP. When an employee's termination pay is processed and there is unused TIL to pay out, the platform will automatically assign the "Unused Leave Payment (Type O)" pay category (unless it is a Type P) to those earnings. Additionally, the pay category assigned by the platform cannot be overridden in the pay run.
Default leave settings
By default, any leave category that is not classified as ETP and does not have the 'Exclude from termination payout' checkbox ticked, will have the 'Unused leave payment (normal termination)' pay category assigned to the "When an employee is paid out unused leave on termination, apply earnings to" dropdown. This is done to ensure paid leave earnings are being reported correctly to the ATO.
Users, however, can choose to replace the pay category assigned with a different pay category. This may be necessary if a business wishes to separate wages paid for each unused leave type, for eg have one pay category for unused LSL paid out on termination and another pay category for unused annual leave paid out on termination.